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Big ambitions need savings plan to match

This week&rsquo;s Moneyville Makeover looks at a couple in their 30s who want a bigger house, more kids and a cottage &mdash; but have no plan to finance it all.

Shane and Sarah, in their early 30s, are concerned about their financial future and aren't sure whether it's best to start paying down debt or start saving. (Glenn Lowson Photo / For the Toronto Star)

This Oakville couple with a young baby are concerned about their financial future. They wonder whether they should quickly pay off their student debts, or save for their daughter's education or their retirement funds. (Glenn Lowson Photo / For the Toronto Star)

Things are looking up for Shane and Sarah. He expects a new job will lift his income to $65,000 next year. After several months on parental leave, Sarah will be back earning about $80,000 a year as a dentist.

Add to that the rent they collect from a tenant in their basement and it’s obvious the couple’s total income will be comfortably high — just not high enough for their super-sized ambitions. They would like two or three children, a bigger home, a cottage and money to travel.

The verdict from Certified Financial Planner Kurt Rosentreter is their combined incomes would simply not be enough to afford all of this, particularly once they add the cost of adequate retirement savings.

“Living in the Greater Toronto Area with white collar goals and dreams, they cannot have it all at these income levels — they are too low,” he argues.

Shane and Sarah were barely into their 30s and still repaying student loans, when they paid $309,000 to buy a handsome home with a two-car garage west of Toronto.

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Luckily, for them, the rise in house prices since 2009 allowed them to roll $25,000 of their student debt into a low-rate mortgage that now stands at $310,000.

While they have not added to their total debt since 2010, they are still paying as much as 5.5 per cent interest on $35,000 of student debt and 11 per cent on $10,000 of credit card debt.

They wrote to Moneyville Makeover to ask for advice after a sobering visit to see a lawyer about their wills. Their budget has been tight this year with Sarah off work. Now, says Shane, they want advice on where to start first — savings or debt payment.

If they continue their same rate of spending next year, they could double the $27,500 they now allocate to debt payment, or they could add to the $5,000 they have budgeted for savings.

“Nothing they have done so far appears to be planned,” frets Rosentreter, an author and senior adviser with Manulife Securities Inc. For example, he argues, they should not have bought a house while still repaying student loans.

They drive old cars, and their jobs will be a short commute away from home. Yet Rosentreter chides them for allocating more than $2,000 a year for restaurant meals, $1,000 for pets and $1,540 a year for cable TV while they still have credit card debt.

“No, cable TV is not a birthright,” he kids. “Should you be taking trips (to a friend’s wedding) while you carry credit card debt? No.”

To put things into perspective, Rosentreter listed the cost of their wish list: A larger house could cost hundreds of thousands, a starter cottage $350,000, setting up Sarah’s own dental office perhaps $500,000, post-secondary education as much as $100,000 per child, and retirement savings $1.5 million to $2 million.

“Retirement isn’t even on their list of goals, but it should be,” warns Rosentreter. “A health issue at 55 years old could retire them early even if they plan to work to age 75.”

The most a middle-income couple turning 65 today can expect to draw from the Canada Pension Plan and Old Age Security is $36,800 a year. To match that amount from private savings, with the same level of security and inflation protection for 25 years, a couple would now need about $869,000 worth of federal government bonds.

Sarah and Shane would have to start saving about $22,000 a year to have a future value of $1.5 million in retirement savings by their early 60s, assuming an average annual return of 5 per cent, Rosentreter notes.

Even so, he suggests the couple’s first priority should be to eliminate all high-interest debt, then to be out of debt entirely by age 55. He urges them to show some spending discipline and self-sacrifice, and prepare to invest in Sarah’s income-earning potential.

Other dentists can earn as much as $500,000 a year by running their own office, he notes. But, to get started, Sarah would need to be in a position to borrow more money.

“Failure to pay off credit cards can hurt your credit rating and limit your ability to get more debt in future (such as for Sarah’s clinic),” Rosentreter warns. Once their non-mortgage debt is paid, they could consider putting money away in a Tax Free Savings Account for development of his wife’s practice.

They should first step up mortgage payments to a least $21,000 a year, which would only be enough to eliminate the mortgage in 25 years if their interest rate were to remain at 2.99 per cent.

Only when they are on the track to being debt-free by age 55 should they focus on starting some savings in Registered Retirement Savings Plans) and perhaps $2,500 a year per child in a Registered Education Savings Plan, he suggests.

If they do decide to have a second or third child, Shane should stay home on parental leave, as he as the lower income, Rosentreter suggests. “If daycare costs are much lower than either of their incomes, they both should work.”

Finally, they should consider the risk that one or both of them could die or become disabled. He advises them to get about $1 million in term life insurance each, plus disability insurance to cover as much of their current income as possible, with inflation protection, until age 65.

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